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Turbotax 2011 free 6. Turbotax 2011 free   Tip Income Table of Contents Introduction Useful Items - You may want to see: Keeping a Daily Tip RecordElectronic tip record. Turbotax 2011 free Reporting Tips to Your EmployerElectronic tip statement. Turbotax 2011 free Final report. Turbotax 2011 free Reporting Tips on Your Tax Return Allocated Tips Introduction This chapter is for employees who receive tips. Turbotax 2011 free All tips you receive are income and are subject to federal income tax. Turbotax 2011 free You must include in gross income all tips you receive directly, charged tips paid to you by your employer, and your share of any tips you receive under a tip-splitting or tip-pooling arrangement. Turbotax 2011 free The value of noncash tips, such as tickets, passes, or other items of value, is also income and subject to tax. Turbotax 2011 free Reporting your tip income correctly is not difficult. Turbotax 2011 free You must do three things. Turbotax 2011 free Keep a daily tip record. Turbotax 2011 free Report tips to your employer. Turbotax 2011 free Report all your tips on your income tax return. Turbotax 2011 free  This chapter will explain these three things and show you what to do on your tax return if you have not done the first two. Turbotax 2011 free This chapter will also show you how to treat allocated tips. Turbotax 2011 free For information on special tip programs and agreements, see Publication 531. Turbotax 2011 free Useful Items - You may want to see: Publication 531 Reporting Tip Income 1244 Employee's Daily Record of Tips and Report to Employer Form (and Instructions) 4137 Social Security and Medicare Tax on Unreported Tip Income 4070 Employee's Report of Tips to Employer Keeping a Daily Tip Record Why keep a daily tip record. Turbotax 2011 free   You must keep a daily tip record so you can: Report your tips accurately to your employer, Report your tips accurately on your tax return, and Prove your tip income if your return is ever questioned. Turbotax 2011 free How to keep a daily tip record. Turbotax 2011 free   There are two ways to keep a daily tip record. Turbotax 2011 free You can either: Write information about your tips in a tip diary, or Keep copies of documents that show your tips, such as restaurant bills and credit or debit card charge slips. Turbotax 2011 free You should keep your daily tip record with your tax or other personal records. Turbotax 2011 free You must keep your records for as long as they are important for administration of the federal tax law. Turbotax 2011 free For information on how long to keep records, see How long to keep records in chapter 1. Turbotax 2011 free    If you keep a tip diary, you can use Form 4070A, Employee's Daily Record of Tips. Turbotax 2011 free To get Form 4070A, ask the Internal Revenue Service (IRS) or your employer for Publication 1244. Turbotax 2011 free Also, Publication 1244 is available online at www. Turbotax 2011 free irs. Turbotax 2011 free gov/pub/irs-pdf/p1244. Turbotax 2011 free pdf. Turbotax 2011 free Publication 1244 includes a 1-year supply of Form 4070A. Turbotax 2011 free Each day, write in the information asked for on the form. Turbotax 2011 free   In addition to the information asked for on Form 4070A, you also need to keep a record of the date and value of any noncash tips you get, such as tickets, passes, or other items of value. Turbotax 2011 free Although you do not report these tips to your employer, you must report them on your tax return. Turbotax 2011 free   If you do not use Form 4070A, start your records by writing your name, your employer's name, and the name of the business (if it is different from your employer's name). Turbotax 2011 free Then, each workday, write the date and the following information. Turbotax 2011 free Cash tips you get directly from customers or from other employees. Turbotax 2011 free Tips from credit and debit card charge customers that your employer pays you. Turbotax 2011 free The value of any noncash tips you get, such as tickets, passes, or other items of value. Turbotax 2011 free The amount of tips you paid out to other employees through tip pools or tip splitting, or other arrangements, and the names of the employees to whom you paid the tips. Turbotax 2011 free Electronic tip record. Turbotax 2011 free   You can use an electronic system provided by your employer to record your daily tips. Turbotax 2011 free If you do, you must receive and keep a paper copy of this record. Turbotax 2011 free Service charges. Turbotax 2011 free    Do not write in your tip diary the amount of any service charge that your employer adds to a customer's bill and then pays to you and treats as wages. Turbotax 2011 free This is part of your wages, not a tip. Turbotax 2011 free See examples below. Turbotax 2011 free Example 1. Turbotax 2011 free Good Food Restaurant adds an 18% charge to the bill for parties of 6 or more customers. Turbotax 2011 free Jane’s bill for food and beverages for her party of 8 includes an amount on the tip line equal to 18% of the charges for food and beverages, and the total includes this amount. Turbotax 2011 free Because Jane did not have an unrestricted right to determine the amount on the “tip line,” the 18% charge is considered a service charge. Turbotax 2011 free Do not include the 18% charge in your tip diary. Turbotax 2011 free Service charges that are paid to you are considered wages, not tips. Turbotax 2011 free Example 2. Turbotax 2011 free Good Food Restaurant also includes sample calculations of tip amounts at the bottom of its bills for food and beverages provided to customers. Turbotax 2011 free David’s bill includes a blank “tip line,” with sample tip calculations of 15%, 18%, and 20% of his charges for food and beverages at the bottom of the bill beneath the signature line. Turbotax 2011 free Because David is free to enter any amount on the “tip line” or leave it blank, any amount he includes is considered a tip. Turbotax 2011 free Be sure to include this amount in your tip diary. Turbotax 2011 free Reporting Tips to Your Employer Why report tips to your employer. Turbotax 2011 free   You must report tips to your employer so that: Your employer can withhold federal income tax and social security, Medicare, Additional Medicare, or railroad retirement taxes, Your employer can report the correct amount of your earnings to the Social Security Administration or Railroad Retirement Board (which affects your benefits when you retire or if you become disabled, or your family's benefits if you die), and You can avoid the penalty for not reporting tips to your employer (explained later). Turbotax 2011 free What tips to report. Turbotax 2011 free   Report to your employer only cash, check, and debit and credit card tips you receive. Turbotax 2011 free   If your total tips for any 1 month from any one job are less than $20, do not report the tips for that month to that employer. Turbotax 2011 free   If you participate in a tip-splitting or tip-pooling arrangement, report only the tips you receive and retain. Turbotax 2011 free Do not report to your employer any portion of the tips you receive that you pass on to other employees. Turbotax 2011 free However, you must report tips you receive from other employees. Turbotax 2011 free    Do not report the value of any noncash tips, such as tickets or passes, to your employer. Turbotax 2011 free You do not pay social security, Medicare, Additional Medicare or railroad retirement taxes on these tips. Turbotax 2011 free How to report. Turbotax 2011 free    If your employer does not give you any other way to report tips, you can use Form 4070. Turbotax 2011 free Fill in the information asked for on the form, sign and date the form, and give it to your employer. Turbotax 2011 free To get a 1-year supply of the form, ask the IRS or your employer for Publication 1244. Turbotax 2011 free   If you do not use Form 4070, give your employer a statement with the following information. Turbotax 2011 free Your name, address, and social security number. Turbotax 2011 free Your employer's name, address, and business name (if it is different from your employer's name). Turbotax 2011 free The month (or the dates of any shorter period) in which you received tips. Turbotax 2011 free The total tips required to be reported for that period. Turbotax 2011 free You must sign and date the statement. Turbotax 2011 free Be sure to keep a copy with your tax or other personal records. Turbotax 2011 free   Your employer may require you to report your tips more than once a month. Turbotax 2011 free However, the statement cannot cover a period of more than 1 calendar month. Turbotax 2011 free Electronic tip statement. Turbotax 2011 free   Your employer can have you furnish your tip statements electronically. Turbotax 2011 free When to report. Turbotax 2011 free   Give your report for each month to your employer by the 10th of the next month. Turbotax 2011 free If the 10th falls on a Saturday, Sunday, or legal holiday, give your employer the report by the next day that is not a Saturday, Sunday, or legal holiday. Turbotax 2011 free Example. Turbotax 2011 free You must report your tips received in September 2014 by October 10, 2014. Turbotax 2011 free Final report. Turbotax 2011 free   If your employment ends during the month, you can report your tips when your employment ends. Turbotax 2011 free Penalty for not reporting tips. Turbotax 2011 free   If you do not report tips to your employer as required, you may be subject to a penalty equal to 50% of the social security, Medicare, and Additional Medicare taxes or railroad retirement tax you owe on the unreported tips. Turbotax 2011 free (For information about these taxes, see Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, later. Turbotax 2011 free ) The penalty amount is in addition to the taxes you owe. Turbotax 2011 free   You can avoid this penalty if you can show reasonable cause for not reporting the tips to your employer. Turbotax 2011 free To do so, attach a statement to your return explaining why you did not report them. Turbotax 2011 free Giving your employer money for taxes. Turbotax 2011 free   Your regular pay may not be enough for your employer to withhold all the taxes you owe on your regular pay plus your reported tips. Turbotax 2011 free If this happens, you can give your employer money until the close of the calendar year to pay the rest of the taxes. Turbotax 2011 free   If you do not give your employer enough money, your employer will apply your regular pay and any money you give in the following order. Turbotax 2011 free All taxes on your regular pay. Turbotax 2011 free Social security, Medicare, and Additional Medicare taxes or railroad retirement taxes on your reported tips. Turbotax 2011 free Federal, state, and local income taxes on your reported tips. Turbotax 2011 free    Any taxes that remain unpaid can be collected by your employer from your next paycheck. Turbotax 2011 free If withholding taxes remain uncollected at the end of the year, you may be subject to a penalty for underpayment of estimated taxes. Turbotax 2011 free See Publication 505, Tax Withholding and Estimated Tax, for more information. Turbotax 2011 free    Uncollected taxes. Turbotax 2011 free You must report on your tax return any social security and Medicare taxes or railroad retirement tax that remained uncollected at the end of 2013. Turbotax 2011 free These uncollected taxes will be shown on your 2013 Form W-2. Turbotax 2011 free See Reporting uncollected social security, Medicare, or railroad retirement taxes on tips reported to your employer under Reporting Tips on Your Tax Return, later. Turbotax 2011 free Reporting Tips on Your Tax Return How to report tips. Turbotax 2011 free    Report your tips with your wages on Form 1040, line 7; Form 1040A, line 7; or Form 1040EZ, line 1. Turbotax 2011 free What tips to report. Turbotax 2011 free   You must report all tips you received in 2013 on your tax return, including both cash tips and noncash tips. Turbotax 2011 free Any tips you reported to your employer for 2013 are included in the wages shown in box 1 of your Form W-2. Turbotax 2011 free Add to the amount in box 1 only the tips you did not report to your employer. Turbotax 2011 free    If you received $20 or more in cash and charge tips in a month and did not report all of those tips to your employer, see Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer, later. Turbotax 2011 free    If you did not keep a daily tip record as required and an amount is shown in box 8 of your Form W-2, see Allocated Tips, later. Turbotax 2011 free   If you kept a daily tip record and reported tips to your employer as required under the rules explained earlier, add the following tips to the amount in box 1 of your Form W-2. Turbotax 2011 free Cash and charge tips you received that totaled less than $20 for any month. Turbotax 2011 free The value of noncash tips, such as tickets, passes, or other items of value. Turbotax 2011 free Example. Turbotax 2011 free Ben Smith began working at the Blue Ocean Restaurant (his only employer in 2013) on June 30 and received $10,000 in wages during the year. Turbotax 2011 free Ben kept a daily tip record showing that his tips for June were $18 and his tips for the rest of the year totaled $7,000. Turbotax 2011 free He was not required to report his June tips to his employer, but he reported all of the rest of his tips to his employer as required. Turbotax 2011 free Ben's Form W-2 from Blue Ocean Restaurant shows $17,000 ($10,000 wages plus $7,000 reported tips) in box 1. Turbotax 2011 free He adds the $18 unreported tips to that amount and reports $17,018 as wages on his tax return. Turbotax 2011 free Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer. Turbotax 2011 free    If you received $20 or more in cash and charge tips in a month from any one job and did not report all of those tips to your employer, you must report the social security, Medicare, and Additional Medicare taxes on the unreported tips as additional tax on your return. Turbotax 2011 free To report these taxes, you must file a return even if you would not otherwise have to file. Turbotax 2011 free You must use Form 1040. Turbotax 2011 free (You cannot file Form 1040EZ or Form 1040A. Turbotax 2011 free )    Use Form 4137 to figure social security and Medicare taxes. Turbotax 2011 free Enter the tax on your return as instructed, and attach the completed Form 4137 to your return. Turbotax 2011 free Use Form 8959 to figure Additional Medicare Tax. Turbotax 2011 free    If you are subject to the Railroad Retirement Tax Act, you cannot use Form 4137 to pay railroad retirement tax on unreported tips. Turbotax 2011 free To get railroad retirement credit, you must report tips to your employer. Turbotax 2011 free Reporting uncollected social security, Medicare, or railroad retirement taxes on tips reported to your employer. Turbotax 2011 free   You may have uncollected taxes if your regular pay was not enough for your employer to withhold all the taxes you owe and you did not give your employer enough money to pay the rest of the taxes. Turbotax 2011 free For more information, see Giving your employer money for taxes , under Reporting Tips to Your Employer, earlier. Turbotax 2011 free   If your employer could not collect all the social security and Medicare taxes or railroad retirement tax you owe on tips reported for 2013, the uncollected taxes will be shown in box 12 of your Form W-2 (codes A and B). Turbotax 2011 free You must report these amounts as additional tax on your return. Turbotax 2011 free Unlike the uncollected portion of the regular (1. Turbotax 2011 free 45%) Medicare tax, the uncollected Additional Medicare Tax is not reported in box 12 of Form W-2 with code B. Turbotax 2011 free    To report these uncollected taxes, you must file a return even if you would not otherwise have to file. Turbotax 2011 free You must report these taxes on Form 1040, line 60. Turbotax 2011 free See the instructions for Form 1040, line 60. Turbotax 2011 free (You cannot file Form 1040EZ or Form 1040A. Turbotax 2011 free ) Allocated Tips If your employer allocated tips to you, they are shown separately in box 8 of your Form W-2. Turbotax 2011 free They are not included in box 1 with your wages and reported tips. Turbotax 2011 free If box 8 is blank, this discussion does not apply to you. Turbotax 2011 free What are allocated tips. Turbotax 2011 free   These are tips that your employer assigned to you in addition to the tips you reported to your employer for the year. Turbotax 2011 free Your employer will have done this only if: You worked in an establishment (restaurant, cocktail lounge, or similar business) that must allocate tips to employees, and The tips you reported to your employer were less than your share of 8% of food and drink sales. Turbotax 2011 free No income, social security, Medicare, Additional Medicare or railroad retirement taxes are withheld on allocated tips. Turbotax 2011 free How were your allocated tips figured. Turbotax 2011 free   The tips allocated to you are your share of an amount figured by subtracting the reported tips of all employees from 8% (or an approved lower rate) of food and drink sales (other than carryout sales and sales with a service charge of 10% or more). Turbotax 2011 free Your share of that amount was figured using either a method provided by an employer-employee agreement or a method provided by IRS regulations based on employees' sales or hours worked. Turbotax 2011 free For information about the exact allocation method used, ask your employer. Turbotax 2011 free Must you report your allocated tips on your tax return. Turbotax 2011 free   You must report all tips you received in 2013 on your tax return, including both cash tips and noncash tips. Turbotax 2011 free Any tips you reported to your employer for 2013 are included in the wages shown in box 1 of your Form W-2. Turbotax 2011 free Add to the amount in box 1 only the tips you did not report to your employer. Turbotax 2011 free This should include any allocated tips shown in box 8 on your Form(s) W-2, unless you have adequate records to show that you received less tips in the year than the allocated figures. Turbotax 2011 free   See What tips to report under Reporting Tips on Your Tax Return, and Keeping a Daily Tip Record , earlier. Turbotax 2011 free How to report allocated tips. Turbotax 2011 free   Report the amount in box 1 and the allocated tips in box 8 of your Form(s) W-2 as wages on Form 1040, line 7; Form 1040NR, line 8; or Form 1040NR-EZ, line 3. Turbotax 2011 free (You cannot file Form 1040A or Form 1040EZ when you have allocated tips. Turbotax 2011 free )    Because social security, Medicare, and Additional Medicare taxes were not withheld from the allocated tips, you must report those taxes as additional tax on your return. Turbotax 2011 free Complete Form 4137, and include the allocated tips on line 1 of the form. Turbotax 2011 free See Reporting social security, Medicare, Additional Medicare, or railroad retirement taxes on tips not reported to your employer under Reporting Tips on Your Tax Return, earlier. Turbotax 2011 free Prev  Up  Next   Home   More Online Publications
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Low Income Taxpayer Clinic Program Reports on Activities

IR-2014-21, March 5, 2014

WASHINGTON — The Internal Revenue Service’s Low Income Taxpayer Clinic (LITC) Program Office issued its second annual program report on how LITCs assist thousands of low income taxpayers nationwide with pro bono representation, education, and advocacy services.

The LITCs provide free or low-cost assistance to low income taxpayers who have a tax dispute with the IRS, such as an audit or collection matter, and conduct education and outreach to taxpayers who speak English as a second language (ESL).  LITCs also advocate for low income taxpayers and highlight the need to change administrative practices and procedures that cause their clients economic hardship. 

“The LITCs help taxpayers achieve favorable outcomes in cases, access benefits administered through the tax system, and resolve tax debts, levies, and liens.  During 2012, LITCs helped taxpayers secure more than $5.8 million in tax refunds and eliminate nearly $35.5 million in tax liabilities, penalties and interest,” said William P. Nelson, LITC Program Director.  The report provides an overview and history of the LITC Program, discusses the type of work the LITCs perform, and explains how their work helps ensure the fairness and integrity of the tax system. 

The LITC program has a three-prong mission to represent, educate, and advocate for taxpayers.  Included in the report are several stories that provide examples of how LITCs have helped taxpayers.  One taxpayer was facing a levy action that put her in danger of losing her home but the LITC was able to negotiate an offer in compromise to eliminate the debt and keep the taxpayer in her home.  LITCs employ staff but also rely on the contributions of volunteers.  In 2012, taxpayers benefited from over 59,000 volunteer hours provided by nearly 2,300 LITC volunteers.

The LITC program awards matching grants of up to $100,000 per year to qualifying organizations to develop, expand, or maintain a low income taxpayer clinic.  The grant program is administered by the Office of the Taxpayer Advocate at the IRS, led by the National Taxpayer Advocate.  Although LITCs receive partial funding from the IRS, LITCs, their employees and volunteers operate independently from the IRS.  LITCs are generally operated by:

  • clinical programs at accredited law, business, or accounting schools;
  • legal aid or legal services organizations; and
  • other tax exempt organizations that serve low income individuals and families.

The Low Income Taxpayer Clinic Program Report is available at http://www.irs.gov/pub/irs-pdf/p5066.pdf.

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Turbotax 2011 free 7. Turbotax 2011 free   Depreciation, Depletion, and Amortization Table of Contents What's New for 2013 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Overview of DepreciationWhat Property Can Be Depreciated? What Property Cannot Be Depreciated? When Does Depreciation Begin and End? Can You Use MACRS To Depreciate Your Property? What Is the Basis of Your Depreciable Property? How Do You Treat Repairs and Improvements? Do You Have To File Form 4562? How Do You Correct Depreciation Deductions? Section 179 Expense DeductionWhat Property Qualifies? What Property Does Not Qualify? How Much Can You Deduct? How Do You Elect the Deduction? When Must You Recapture the Deduction? Claiming the Special Depreciation AllowanceWhat is Qualified Property? How Can You Elect Not To Claim the Allowance? When Must You Recapture an Allowance Figuring Depreciation Under MACRSWhich Depreciation System (GDS or ADS) Applies? Which Property Class Applies Under GDS? What Is the Placed-in-Service Date? What Is the Basis for Depreciation? Which Recovery Period Applies? Which Convention Applies? Which Depreciation Method Applies? How Is the Depreciation Deduction Figured? How Do You Use General Asset Accounts? When Do You Recapture MACRS Depreciation? Additional Rules for Listed PropertyWhat Is Listed Property? What Is the Business-Use Requirement? Do the Passenger Automobile Limits Apply? Depletion Who Can Claim Depletion? Figuring Depletion AmortizationBusiness Start-Up Costs Reforestation Costs Section 197 Intangibles What's New for 2013 Increased section 179 expense deduction dollar limits. Turbotax 2011 free  The maximum amount you can elect to deduct for most section 179 property you placed in service in 2013 is $500,000. Turbotax 2011 free This limit is reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Turbotax 2011 free See Dollar Limits under Section 179 Expense Deduction , later. Turbotax 2011 free Extension of special depreciation allowance for certain qualified property acquired after December 31, 2007. Turbotax 2011 free . Turbotax 2011 free  You may be able to take a 50% special depreciation allowance for certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Turbotax 2011 free See Claiming the Special Depreciation Allowance , later. Turbotax 2011 free Expiration of the 3- year recovery period for certain race horses. Turbotax 2011 free  The 3-year recovery period for race horses two years old or younger will expire for such horses placed in service after December 31, 2013. Turbotax 2011 free Introduction If you buy or make improvements to farm property such as machinery, equipment, livestock, or a structure with a useful life of more than a year, you generally cannot deduct its entire cost in one year. Turbotax 2011 free Instead, you must spread the cost over the time you use the property and deduct part of it each year. Turbotax 2011 free For most types of property, this is called depreciation. Turbotax 2011 free This chapter gives information on depreciation methods that generally apply to property placed in service after 1986. Turbotax 2011 free For information on depreciating pre-1987 property, see Publication 534, Depreciating Property Placed in Service Before 1987. Turbotax 2011 free Topics - This chapter discusses: Overview of depreciation Section 179 expense deduction Special depreciation allowance Modified Accelerated Cost Recovery System (MACRS) Listed property Basic information on cost depletion (including timber depletion) and percentage depletion Amortization of the costs of going into business, reforestation costs, the costs of pollution control facilities, and the costs of section 197 intangibles Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) T (Timber), Forest Activities Schedule 3115 Application for Change in Accounting Method 4562 Depreciation and Amortization 4797 Sales of Business Property See chapter 16 for information about getting publications and forms. Turbotax 2011 free It is important to keep good records for property you depreciate. Turbotax 2011 free Do not file these records with your return. Turbotax 2011 free Instead, you should keep them as part of the permanent records of the depreciated property. Turbotax 2011 free They will help you verify the accuracy of the depreciation of assets placed in service in the current and previous tax years. Turbotax 2011 free For general information on recordkeeping, see Publication 583, Starting a Business and Keeping Records. Turbotax 2011 free For specific information on keeping records for section 179 property and listed property, see Publication 946, How To Depreciate Property. Turbotax 2011 free Overview of Depreciation This overview discusses basic information on the following. Turbotax 2011 free What property can be depreciated. Turbotax 2011 free What property cannot be depreciated. Turbotax 2011 free When depreciation begins and ends. Turbotax 2011 free Whether MACRS can be used to figure depreciation. Turbotax 2011 free What is the basis of your depreciable property. Turbotax 2011 free How to treat repairs and improvements. Turbotax 2011 free When you must file Form 4562. Turbotax 2011 free How you can correct depreciation claimed incorrectly. Turbotax 2011 free What Property Can Be Depreciated? You can depreciate most types of tangible property (except land), such as buildings, machinery, equipment, vehicles, certain livestock, and furniture. Turbotax 2011 free You can also depreciate certain intangible property, such as copyrights, patents, and computer software. Turbotax 2011 free To be depreciable, the property must meet all the following requirements. Turbotax 2011 free It must be property you own. Turbotax 2011 free It must be used in your business or income-producing activity. Turbotax 2011 free It must have a determinable useful life. Turbotax 2011 free It must have a useful life that extends substantially beyond the year you place it in service. Turbotax 2011 free Property You Own To claim depreciation, you usually must be the owner of the property. Turbotax 2011 free You are considered as owning property even if it is subject to a debt. Turbotax 2011 free Leased property. Turbotax 2011 free   You can depreciate leased property only if you retain the incidents of ownership in the property. Turbotax 2011 free This means you bear the burden of exhaustion of the capital investment in the property. Turbotax 2011 free Therefore, if you lease property from someone to use in your trade or business or for the production of income, you generally cannot depreciate its cost because you do not retain the incidents of ownership. Turbotax 2011 free You can, however, depreciate any capital improvements you make to the leased property. Turbotax 2011 free See Additions and Improvements under Which Recovery Period Applies in chapter 4 of Publication 946. Turbotax 2011 free   If you lease property to someone, you generally can depreciate its cost even if the lessee (the person leasing from you) has agreed to preserve, replace, renew, and maintain the property. Turbotax 2011 free However, you cannot depreciate the cost of the property if the lease provides that the lessee is to maintain the property and return to you the same property or its equivalent in value at the expiration of the lease in as good condition and value as when leased. Turbotax 2011 free Life tenant. Turbotax 2011 free   Generally, if you hold business or investment property as a life tenant, you can depreciate it as if you were the absolute owner of the property. Turbotax 2011 free See Certain term interests in property , later, for an exception. Turbotax 2011 free Property Used in Your Business or Income-Producing Activity To claim depreciation on property, you must use it in your business or income-producing activity. Turbotax 2011 free If you use property to produce income (investment use), the income must be taxable. Turbotax 2011 free You cannot depreciate property that you use solely for personal activities. Turbotax 2011 free However, if you use property for business or investment purposes and for personal purposes, you can deduct depreciation based only on the percentage of business or investment use. Turbotax 2011 free Example 1. Turbotax 2011 free   If you use your car for farm business, you can deduct depreciation based on its percentage of use in farming. Turbotax 2011 free If you also use it for investment purposes, you can depreciate it based on its percentage of investment use. Turbotax 2011 free Example 2. Turbotax 2011 free   If you use part of your home for business, you may be able to deduct depreciation on that part based on its business use. Turbotax 2011 free For more information, see Business Use of Your Home in chapter 4. Turbotax 2011 free Inventory. Turbotax 2011 free   You can never depreciate inventory because it is not held for use in your business. Turbotax 2011 free Inventory is any property you hold primarily for sale to customers in the ordinary course of your business. Turbotax 2011 free Livestock. Turbotax 2011 free   Livestock purchased for draft, breeding, or dairy purposes can be depreciated only if they are not kept in an inventory account. Turbotax 2011 free Livestock you raise usually has no depreciable basis because the costs of raising them are deducted and not added to their basis. Turbotax 2011 free However, see Immature livestock under When Does Depreciation Begin and End , later, for a special rule. Turbotax 2011 free Property Having a Determinable Useful Life To be depreciable, your property must have a determinable useful life. Turbotax 2011 free This means it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Turbotax 2011 free Irrigation systems and water wells. Turbotax 2011 free   Irrigation systems and wells used in a trade or business can be depreciated if their useful life can be determined. Turbotax 2011 free You can depreciate irrigation systems and wells composed of masonry, concrete, tile, metal, or wood. Turbotax 2011 free In addition, you can depreciate costs for moving dirt to construct irrigation systems and water wells composed of these materials. Turbotax 2011 free However, land preparation costs for center pivot irrigation systems are not depreciable. Turbotax 2011 free Dams, ponds, and terraces. Turbotax 2011 free   In general, you cannot depreciate earthen dams, ponds, and terraces unless the structures have a determinable useful life. Turbotax 2011 free What Property Cannot Be Depreciated? Certain property cannot be depreciated, even if the requirements explained earlier are met. Turbotax 2011 free This includes the following. Turbotax 2011 free Land. Turbotax 2011 free You can never depreciate the cost of land because land does not wear out, become obsolete, or get used up. Turbotax 2011 free The cost of land generally includes the cost of clearing, grading, planting, and landscaping. Turbotax 2011 free Although you cannot depreciate land, you can depreciate certain costs incurred in preparing land for business use. Turbotax 2011 free See chapter 1 of Publication 946. Turbotax 2011 free Property placed in service and disposed of in the same year. Turbotax 2011 free Determining when property is placed in service is explained later. Turbotax 2011 free Equipment used to build capital improvements. Turbotax 2011 free You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Turbotax 2011 free Intangible property such as section 197 intangibles. Turbotax 2011 free This property does not have a determinable useful life and generally cannot be depreciated. Turbotax 2011 free However, see Amortization , later. Turbotax 2011 free Special rules apply to computer software (discussed below). Turbotax 2011 free Certain term interests (discussed below). Turbotax 2011 free Computer software. Turbotax 2011 free   Computer software is generally not a section 197 intangible even if acquired in connection with the acquisition of a business, if it meets all of the following tests. Turbotax 2011 free It is readily available for purchase by the general public. Turbotax 2011 free It is subject to a nonexclusive license. Turbotax 2011 free It has not been substantially modified. Turbotax 2011 free   If the software meets the tests above, it can be depreciated and may qualify for the section 179 expense deduction and the special depreciation allowance (if applicable), discussed later. Turbotax 2011 free Certain term interests in property. Turbotax 2011 free   You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. Turbotax 2011 free This rule does not apply to the holder of a term interest in property acquired by gift, bequest, or inheritance. Turbotax 2011 free For more information, see chapter 1 of Publication 946. Turbotax 2011 free When Does Depreciation Begin and End? You begin to depreciate your property when you place it in service for use in your trade or business or for the production of income. Turbotax 2011 free You stop depreciating property either when you have fully recovered your cost or other basis or when you retire it from service, whichever happens first. Turbotax 2011 free Placed in Service Property is placed in service when it is ready and available for a specific use, whether in a business activity, an income-producing activity, a tax-exempt activity, or a personal activity. Turbotax 2011 free Even if you are not using the property, it is in service when it is ready and available for its specific use. Turbotax 2011 free Example. Turbotax 2011 free You bought a planter for use in your farm business. Turbotax 2011 free The planter was delivered in December 2012 after harvest was over. Turbotax 2011 free You begin to depreciate the planter for 2012 because it was ready and available for its specific use in 2012, even though it will not be used until the spring of 2013. Turbotax 2011 free If your planter comes unassembled in December 2012 and is put together in February 2013, it is not placed in service until 2013. Turbotax 2011 free You begin to depreciate it in 2013. Turbotax 2011 free If your planter was delivered and assembled in February 2013 but not used until April 2013, it is placed in service in February 2013, because this is when the planter was ready for its specified use. Turbotax 2011 free You begin to depreciate it in 2013. Turbotax 2011 free Fruit or nut trees and vines. Turbotax 2011 free   If you acquire an orchard, grove, or vineyard before the trees or vines have reached the income-producing stage, and they have a preproductive period of more than 2 years, you must capitalize the preproductive-period costs under the uniform capitalization rules (unless you elect not to use these rules). Turbotax 2011 free See chapter 6 for information about the uniform capitalization rules. Turbotax 2011 free Your depreciation begins when the trees and vines reach the income-producing stage (that is, when they bear fruit, nuts, or grapes in quantities sufficient to commercially warrant harvesting). Turbotax 2011 free Immature livestock. Turbotax 2011 free   Depreciation for livestock begins when the livestock reaches the age of maturity. Turbotax 2011 free If you bought immature livestock for drafting purposes, depreciation begins when they can be worked. Turbotax 2011 free If you bought immature livestock for dairy purposes, depreciation begins when they can be milked. Turbotax 2011 free If you bought immature livestock for breeding purposes, depreciation begins when they can be bred. Turbotax 2011 free Your basis for depreciation is your initial cost for the immature livestock. Turbotax 2011 free Idle Property Continue to claim a deduction for depreciation on property used in your business or for the production of income even if it is temporarily idle. Turbotax 2011 free For example, if you stop using a machine because there is a temporary lack of a market for a product made with that machine, continue to deduct depreciation on the machine. Turbotax 2011 free Cost or Other Basis Fully Recovered You stop depreciating property when you have fully recovered your cost or other basis. Turbotax 2011 free This happens when your section 179 and allowed or allowable depreciation deductions equal your cost or investment in the property. Turbotax 2011 free Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Turbotax 2011 free You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Turbotax 2011 free You sell or exchange the property. Turbotax 2011 free You convert the property to personal use. Turbotax 2011 free You abandon the property. Turbotax 2011 free You transfer the property to a supplies or scrap account. Turbotax 2011 free The property is destroyed. Turbotax 2011 free For information on abandonment of property, see chapter 8. Turbotax 2011 free For information on destroyed property, see chapter 11 and Publication 547, Casualties, Disasters, and Thefts. Turbotax 2011 free Can You Use MACRS To Depreciate Your Property? You must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate most business and investment property placed in service after 1986. Turbotax 2011 free MACRS is explained later under Figuring Depreciation Under MACRS . Turbotax 2011 free You cannot use MACRS to depreciate the following property. Turbotax 2011 free Property you placed in service before 1987. Turbotax 2011 free Use the methods discussed in Publication 534. Turbotax 2011 free Certain property owned or used in 1986. Turbotax 2011 free See chapter 1 of Publication 946. Turbotax 2011 free Intangible property. Turbotax 2011 free Films, video tapes, and recordings. Turbotax 2011 free Certain corporate or partnership property acquired in a nontaxable transfer. Turbotax 2011 free Property you elected to exclude from MACRS. Turbotax 2011 free For more information, see chapter 1 of Publication 946. Turbotax 2011 free What Is the Basis of Your Depreciable Property? To figure your depreciation deduction, you must determine the basis of your property. Turbotax 2011 free To determine basis, you need to know the cost or other basis of your property. Turbotax 2011 free Cost or other basis. Turbotax 2011 free   The basis of property you buy is usually its cost plus amounts you paid for items such as sales tax, freight charges, and installation and testing fees. Turbotax 2011 free The cost includes the amount you pay in cash, debt obligations, other property, or services. Turbotax 2011 free   There are times when you cannot use cost as basis. Turbotax 2011 free In these situations, the fair market value (FMV) or the adjusted basis of the property may be used. Turbotax 2011 free Adjusted basis. Turbotax 2011 free   To find your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service. Turbotax 2011 free Basis adjustment for depreciation allowed or allowable. Turbotax 2011 free   After you place your property in service, you must reduce the basis of the property by the depreciation allowed or allowable, whichever is greater. Turbotax 2011 free Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Turbotax 2011 free Depreciation allowable is depreciation you are entitled to deduct. Turbotax 2011 free   If you do not claim depreciation you are entitled to deduct, you must still reduce the basis of the property by the full amount of depreciation allowable. Turbotax 2011 free   If you deduct more depreciation than you should, you must reduce your basis by any amount deducted from which you received a tax benefit (the depreciation allowed). Turbotax 2011 free   For more information, see chapter 6. Turbotax 2011 free How Do You Treat Repairs and Improvements? You generally deduct the cost of repairing business property in the same way as any other business expense. Turbotax 2011 free However, if a repair or replacement increases the value of your property, makes it more useful, or lengthens its life, you must treat it as an improvement and depreciate it. Turbotax 2011 free Treat improvements as separate depreciable property. Turbotax 2011 free See chapter 1 of Publication 946 for more information. Turbotax 2011 free Example. Turbotax 2011 free You repair a small section on a corner of the roof of a barn that you rent to others. Turbotax 2011 free You deduct the cost of the repair as a business expense. Turbotax 2011 free However, if you replace the entire roof, the new roof is considered to be an improvement because it increases the value and lengthens the life for the property. Turbotax 2011 free You depreciate the cost of the new roof. Turbotax 2011 free Improvements to rented property. Turbotax 2011 free   You can depreciate permanent improvements you make to business property you rent from someone else. Turbotax 2011 free Do You Have To File Form 4562? Use Form 4562 to claim your deduction for depreciation and amortization. Turbotax 2011 free You must complete and attach Form 4562 to your tax return if you are claiming any of the following. Turbotax 2011 free A section 179 expense deduction for the current year or a section 179 carryover from a prior year. Turbotax 2011 free Depreciation for property placed in service during the current year. Turbotax 2011 free Depreciation on any vehicle or other listed property, regardless of when it was placed in service. Turbotax 2011 free Amortization of costs that began in the current year. Turbotax 2011 free For more information, see the Instructions for Form 4562. Turbotax 2011 free How Do You Correct Depreciation Deductions? If you deducted an incorrect amount of depreciation in any year, you may be able to make a correction by filing an amended return for that year. Turbotax 2011 free You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Turbotax 2011 free You claimed the incorrect amount because of a mathematical error made in any year. Turbotax 2011 free You claimed the incorrect amount because of a posting error made in any year, for example, omitting an asset from the depreciation schedule. Turbotax 2011 free You have not adopted a method of accounting for the property placed in service by you in tax years ending after December 29, 2003. Turbotax 2011 free You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Turbotax 2011 free Note. Turbotax 2011 free You have adopted a method of accounting if you used the same incorrect method of depreciation for two or more consecutively filed returns. Turbotax 2011 free If you are not allowed to make the correction on an amended return, you may be able to change your accounting method to claim the correct amount of depreciation. Turbotax 2011 free See the Instructions for Form 3115. Turbotax 2011 free Section 179 Expense Deduction You can elect to recover all or part of the cost of certain qualifying property, up to a limit, by deducting it in the year you place the property in service. Turbotax 2011 free This is the section 179 expense deduction. Turbotax 2011 free You can elect the section 179 expense deduction instead of recovering the cost by taking depreciation deductions. Turbotax 2011 free This part of the chapter explains the rules for the section 179 expense deduction. Turbotax 2011 free It explains what property qualifies for the deduction, what property does not qualify for the deduction, the limits that may apply, how to elect the deduction, and when you may have to recapture the deduction. Turbotax 2011 free For more information, see chapter 2 of Publication 946. Turbotax 2011 free What Property Qualifies? To qualify for the section 179 expense deduction, your property must meet all the following requirements. Turbotax 2011 free It must be eligible property. Turbotax 2011 free It must be acquired for business use. Turbotax 2011 free It must have been acquired by purchase. Turbotax 2011 free Eligible Property To qualify for the section 179 expense deduction, your property must be one of the following types of depreciable property. Turbotax 2011 free Tangible personal property. Turbotax 2011 free Qualified real property. Turbotax 2011 free (Special rules apply to qualified real property that you elect to treat as qualified section 179 real property. Turbotax 2011 free For more information, see chapter 2 of Publication 946 and section 179(f) of the Internal Revenue Code. Turbotax 2011 free ) Other tangible property (except buildings and their structural components) used as: An integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services; A research facility used in connection with any of the activities in (a) above; or A facility used in connection with any of the activities in (a) for the bulk storage of fungible commodities. Turbotax 2011 free Single purpose agricultural (livestock) or horticultural structures. Turbotax 2011 free Storage facilities (except buildings and their structural components) used in connection with distributing petroleum or any primary product of petroleum. Turbotax 2011 free Off-the-shelf computer software that is readily available for purchase by the general public, is subject to a nonexclusive lease, and has not been substantially modified. Turbotax 2011 free Tangible personal property. Turbotax 2011 free   Tangible personal property is any tangible property that is not real property. Turbotax 2011 free It includes the following property. Turbotax 2011 free Machinery and equipment. Turbotax 2011 free Property contained in or attached to a building (other than structural components), such as milk tanks, automatic feeders, barn cleaners, and office equipment. Turbotax 2011 free Gasoline storage tanks and pumps at retail service stations. Turbotax 2011 free Livestock, including horses, cattle, hogs, sheep, goats, and mink and other fur-bearing animals. Turbotax 2011 free Facility used for the bulk storage of fungible commodities. Turbotax 2011 free   A facility used for the bulk storage of fungible commodities is qualifying property for purposes of the section 179 expense deduction if it is used in connection with any of the activities listed earlier in item (3)(a). Turbotax 2011 free Bulk storage means the storage of a commodity in a large mass before it is used. Turbotax 2011 free Grain bins. Turbotax 2011 free   A grain bin is an example of a storage facility that is qualifying section 179 property. Turbotax 2011 free It is a facility used in connection with the production of grain or livestock for the bulk storage of fungible commodities. Turbotax 2011 free Single purpose agricultural or horticultural structures. Turbotax 2011 free   A single purpose agricultural (livestock) or horticultural structure is qualifying property for purposes of the section 179 expense deduction. Turbotax 2011 free Agricultural structure. Turbotax 2011 free   A single purpose agricultural (livestock) structure is any building or enclosure specifically designed, constructed, and used for both the following reasons. Turbotax 2011 free To house, raise, and feed a particular type of livestock and its produce. Turbotax 2011 free To house the equipment, including any replacements, needed to house, raise, or feed the livestock. Turbotax 2011 free For this purpose, livestock includes poultry. Turbotax 2011 free   Single purpose structures are qualifying property if used, for example, to breed chickens or hogs, produce milk from dairy cattle, or produce feeder cattle or pigs, broiler chickens, or eggs. Turbotax 2011 free The facility must include, as an integral part of the structure or enclosure, equipment necessary to house, raise, and feed the livestock. Turbotax 2011 free Horticultural structure. Turbotax 2011 free   A single purpose horticultural structure is either of the following. Turbotax 2011 free A greenhouse specifically designed, constructed, and used for the commercial production of plants. Turbotax 2011 free A structure specifically designed, constructed, and used for the commercial production of mushrooms. Turbotax 2011 free Use of structure. Turbotax 2011 free   A structure must be used only for the purpose that qualified it. Turbotax 2011 free For example, a hog barn will not be qualifying property if you use it to house poultry. Turbotax 2011 free Similarly, using part of your greenhouse to sell plants will make the greenhouse nonqualifying property. Turbotax 2011 free   If a structure includes work space, the work space can be used only for the following activities. Turbotax 2011 free Stocking, caring for, or collecting livestock or plants or their produce. Turbotax 2011 free Maintaining the enclosure or structure. Turbotax 2011 free Maintaining or replacing the equipment or stock enclosed or housed in the structure. Turbotax 2011 free Property Acquired by Purchase To qualify for the section 179 expense deduction, your property must have been acquired by purchase. Turbotax 2011 free For example, property acquired by gift or inheritance does not qualify. Turbotax 2011 free Property acquired from a related person (that is, your spouse, ancestors, or lineal descendants) is not considered acquired by purchase. Turbotax 2011 free Example. Turbotax 2011 free Ken is a farmer. Turbotax 2011 free He purchased two tractors, one from his brother and one from his father. Turbotax 2011 free He placed both tractors in service in the same year he bought them. Turbotax 2011 free The tractor purchased from his father does not qualify for the section 179 expense deduction because he is a related person (as defined above). Turbotax 2011 free The tractor purchased from his brother does qualify for the deduction because Ken is not a related person (as defined above). Turbotax 2011 free What Property Does Not Qualify? Land and improvements. Turbotax 2011 free   Land and land improvements, do not qualify as section 179 property. Turbotax 2011 free Land improvements include nonagricultural fences, swimming pools, paved parking areas, wharves, docks, bridges, and fences. Turbotax 2011 free However, agricultural fences do qualify as section 179 property. Turbotax 2011 free Similarly, field drainage tile also qualifies as section 179 property. Turbotax 2011 free Excepted property. Turbotax 2011 free   Even if the requirements explained in the preceding discussions are met, farmers cannot elect the section 179 expense deduction for the following property. Turbotax 2011 free Certain property you lease to others (if you are a noncorporate lessor). Turbotax 2011 free Certain property used predominantly to furnish lodging or in connection with the furnishing of lodging. Turbotax 2011 free Property used by a tax-exempt organization (other than a tax-exempt farmers' cooperative) unless the property is used mainly in a taxable unrelated trade or business. Turbotax 2011 free Property used by governmental units or foreign persons or entities (except property used under a lease with a term of less than 6 months). Turbotax 2011 free How Much Can You Deduct? Your section 179 expense deduction is generally the cost of the qualifying property. Turbotax 2011 free However, the total amount you can elect to deduct under section 179 is subject to a dollar limit and a business income limit. Turbotax 2011 free These limits apply to each taxpayer, not to each business. Turbotax 2011 free However, see Married individuals under Dollar Limits , later. Turbotax 2011 free See also the special rules for applying the limits for partnerships and S corporations under Partnerships and S Corporations , later. Turbotax 2011 free If you deduct only part of the cost of qualifying property as a section 179 expense deduction, you can generally depreciate the cost you do not deduct. Turbotax 2011 free Use Part I of Form 4562 to figure your section 179 expense deduction. Turbotax 2011 free Partial business use. Turbotax 2011 free   When you use property for business and nonbusiness purposes, you can elect the section 179 expense deduction only if you use it more than 50% for business in the year you place it in service. Turbotax 2011 free If you used the property more than 50% for business, multiply the cost of the property by the percentage of business use. Turbotax 2011 free Use the resulting business cost to figure your section 179 expense deduction. Turbotax 2011 free Trade-in of other property. Turbotax 2011 free   If you buy qualifying property with cash and a trade-in, its cost for purposes of the section 179 expense deduction includes only the cash you paid. Turbotax 2011 free For example, if you buy (for cash and a trade-in) a new tractor for use in your business, your cost for the section 179 expense deduction is the cash you paid. Turbotax 2011 free It does not include the adjusted basis of the old tractor you trade for the new tractor. Turbotax 2011 free Example. Turbotax 2011 free J-Bar Farms traded two cultivators having a total adjusted basis of $6,800 for a new cultivator costing $13,200. Turbotax 2011 free They received an $8,000 trade-in allowance for the old cultivators and paid $5,200 cash for the new cultivator. Turbotax 2011 free J-Bar also traded a used pickup truck with an adjusted basis of $8,000 for a new pickup truck costing $35,000. Turbotax 2011 free They received a $5,000 trade-in allowance and paid $30,000 cash for the new pickup truck. Turbotax 2011 free Only the cash paid by J-Bar qualifies for the section 179 expense deduction. Turbotax 2011 free J-Bar's business costs that qualify for a section 179 expense deduction are $35,200 ($5,200 + $30,000). Turbotax 2011 free Dollar Limits The total amount you can elect to deduct under section 179 for most property placed in service in 2013 is $500,000. Turbotax 2011 free If you acquire and place in service more than one item of qualifying property during the year, you can allocate the section 179 expense deduction among the items in any way, as long as the total deduction is not more than $500,000. Turbotax 2011 free Qualified real property that you elect to treat as section 179 property is limited to $250,000 of the maximum section 179 deduction of $500,000 for 2013. Turbotax 2011 free You do not have to claim the full $500,000. Turbotax 2011 free For specific information on the section 179 dollar limits, see chapter 2 of Publication 946. Turbotax 2011 free Reduced dollar limit for cost exceeding $2 million. Turbotax 2011 free   If the cost of your qualifying section 179 property placed in service in 2013 is over $2 million, you must reduce the dollar limit (but not below zero) by the amount of cost over $2 million. Turbotax 2011 free If the cost of your section 179 property placed in service during 2013 is $2,500,000 or more, you cannot take a section 179 expense deduction and you cannot carry over the cost that is more than $2,500,000. Turbotax 2011 free Example. Turbotax 2011 free This year, James Smith placed in service machinery costing $2,050,000. Turbotax 2011 free Because this cost is $50,000 more than $2 million, he must reduce his dollar limit to $450,000 ($500,000 − $50,000). Turbotax 2011 free Limits for sport utility vehicles. Turbotax 2011 free   The total amount you can elect to deduct for certain sport utility vehicles and certain other vehicles placed in service in 2013 is $25,000. Turbotax 2011 free This rule applies to any 4-wheeled vehicle primarily designed or used to carry passengers over public streets, roads, and highways that is rated at more than 6,000 pounds gross vehicle weight and not more than 14,000 pounds gross vehicle weight. Turbotax 2011 free   For more information, see chapter 2 of Publication 946. Turbotax 2011 free Limits for passenger automobiles. Turbotax 2011 free   For a passenger automobile that is placed in service in 2013, the total section 179 and depreciation deduction is limited. Turbotax 2011 free See Do the Passenger Automobile Limits Apply , later. Turbotax 2011 free Married individuals. Turbotax 2011 free   If you are married, how you figure your section 179 expense deduction depends on whether you file jointly or separately. Turbotax 2011 free If you file a joint return, you and your spouse are treated as one taxpayer in determining any reduction to the dollar limit, regardless of which of you purchased the property or placed it in service. Turbotax 2011 free If you and your spouse file separate returns, you are treated as one taxpayer for the dollar limit, including the reduction for costs over $2 million. Turbotax 2011 free You must allocate the dollar limit (after any reduction) equally between you, unless you both elect a different allocation. Turbotax 2011 free If the percentages elected by each of you do not total 100%, 50% will be allocated to each of you. Turbotax 2011 free Joint return after separate returns. Turbotax 2011 free   If you and your spouse elect to amend your separate returns by filing a joint return after the due date for filing your return, the dollar limit on the joint return is the lesser of the following amounts. Turbotax 2011 free The dollar limit (after reduction for any cost of section 179 property over $2 million). Turbotax 2011 free The total cost of section 179 property you and your spouse elected to expense on your separate returns. Turbotax 2011 free Business Income Limit The total cost you can deduct each year after you apply the dollar limit is limited to the taxable income from the active conduct of any trade or business during the year. Turbotax 2011 free Generally, you are considered to actively conduct a trade or business if you meaningfully participate in the management or operations of the trade or business. Turbotax 2011 free Any cost not deductible in one year under section 179 because of this limit can be carried to the next year. Turbotax 2011 free See Carryover of disallowed deduction , later. Turbotax 2011 free Taxable income. Turbotax 2011 free   In general, figure taxable income for this purpose by totaling the net income and losses from all trades and businesses you actively conducted during the year. Turbotax 2011 free In addition to net income or loss from a sole proprietorship, partnership, or S corporation, net income or loss derived from a trade or business also includes the following items. Turbotax 2011 free Section 1231 gains (or losses) as discussed in chapter 9. Turbotax 2011 free Interest from working capital of your trade or business. Turbotax 2011 free Wages, salaries, tips, or other pay earned by you (or your spouse if you file a joint return) as an employee of any employer. Turbotax 2011 free   In addition, figure taxable income without regard to any of the following. Turbotax 2011 free The section 179 expense deduction. Turbotax 2011 free The self-employment tax deduction. Turbotax 2011 free Any net operating loss carryback or carryforward. Turbotax 2011 free Any unreimbursed employee business expenses. Turbotax 2011 free Two different taxable income limits. Turbotax 2011 free   In addition to the business income limit for your section 179 expense deduction, you may have a taxable income limit for some other deduction (for example, charitable contributions). Turbotax 2011 free You may have to figure the limit for this other deduction taking into account the section 179 expense deduction. Turbotax 2011 free If so, complete the following steps. Turbotax 2011 free Step Action 1 Figure taxable income without the section 179 expense deduction or the other deduction. Turbotax 2011 free 2 Figure a hypothetical section 179 expense deduction using the taxable income figured in Step 1. Turbotax 2011 free 3 Subtract the hypothetical section 179 expense deduction figured in Step 2 from the taxable income figured in Step 1. Turbotax 2011 free 4 Figure a hypothetical amount for the other deduction using the amount figured in Step 3 as taxable income. Turbotax 2011 free 5 Subtract the hypothetical other deduction figured in Step 4 from the taxable income figured in  Step 1. Turbotax 2011 free 6 Figure your actual section 179 expense deduction using the taxable income figured in Step 5. Turbotax 2011 free 7 Subtract your actual section 179 expense deduction figured in Step 6 from the taxable income figured in Step 1. Turbotax 2011 free 8 Figure your actual other deduction using the taxable income figured in Step 7. Turbotax 2011 free Example. Turbotax 2011 free On February 1, 2013, the XYZ farm corporation purchased and placed in service qualifying section 179 property that cost $500,000. Turbotax 2011 free It elects to expense the entire $500,000 cost under section 179. Turbotax 2011 free In June, the corporation gave a charitable contribution of $10,000. Turbotax 2011 free A corporation's limit on charitable contributions is figured after subtracting any section 179 expense deduction. Turbotax 2011 free The business income limit for the section 179 expense deduction is figured after subtracting any allowable charitable contributions. Turbotax 2011 free XYZ's taxable income figured without the section 179 expense deduction or the deduction for charitable contributions is $520,000. Turbotax 2011 free XYZ figures its section 179 expense deduction and its deduction for charitable contributions as follows. Turbotax 2011 free Step 1. Turbotax 2011 free Taxable income figured without either deduction is $520,000. Turbotax 2011 free Step 2. Turbotax 2011 free Using $520,000 as taxable income, XYZ's hypothetical section 179 expense deduction is $500,000. Turbotax 2011 free Step 3. Turbotax 2011 free $20,000 ($520,000 − $500,000). Turbotax 2011 free Step 4. Turbotax 2011 free Using $20,000 (from Step 3) as taxable income, XYZ's hypothetical charitable contribution (limited to 10% of taxable income) is $2,000. Turbotax 2011 free Step 5. Turbotax 2011 free $518,000 ($520,000 − $2,000). Turbotax 2011 free Step 6. Turbotax 2011 free Using $518,000 (from Step 5) as taxable income, XYZ figures the actual section 179 expense deduction. Turbotax 2011 free Because the taxable income is at least $500,000, XYZ can take a $500,000 section 179 expense deduction. Turbotax 2011 free Step 7. Turbotax 2011 free $20,000 ($520,000 − $500,000). Turbotax 2011 free Step 8. Turbotax 2011 free Using $20,000 (from Step 7) as taxable income, XYZ's actual charitable contribution (limited to 10% of taxable income) is $2,000. Turbotax 2011 free Carryover of disallowed deduction. Turbotax 2011 free   You can carry over for an unlimited number of years the cost of any section 179 property you elected to expense but were unable to because of the business income limit. Turbotax 2011 free   The amount you carry over is used in determining your section 179 expense deduction in the next year. Turbotax 2011 free However, it is subject to the limits in that year. Turbotax 2011 free If you place more than one property in service in a year, you can select the properties for which all or a part of the cost will be carried forward. Turbotax 2011 free Your selections must be shown in your books and records. Turbotax 2011 free Example. Turbotax 2011 free Last year, Joyce Jones placed in service a machine that cost $8,000 and elected to deduct all $8,000 under section 179. Turbotax 2011 free The taxable income from her business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) was $6,000. Turbotax 2011 free Her section 179 expense deduction was limited to $6,000. Turbotax 2011 free The $2,000 cost that was not allowed as a section 179 expense deduction (because of the business income limit) is carried to this year. Turbotax 2011 free This year, Joyce placed another machine in service that cost $9,000. Turbotax 2011 free Her taxable income from business (determined without regard to both a section 179 expense deduction for the cost of the machine and the self-employment tax deduction) is $10,000. Turbotax 2011 free Joyce can deduct the full cost of the machine ($9,000) but only $1,000 of the carryover from last year because of the business income limit. Turbotax 2011 free She can carry over the balance of $1,000 to next year. Turbotax 2011 free Partnerships and S Corporations The section 179 expense deduction limits apply both to the partnership or S corporation and to each partner or shareholder. Turbotax 2011 free The partnership or S corporation determines its section 179 expense deduction subject to the limits. Turbotax 2011 free It then allocates the deduction among its partners or shareholders. Turbotax 2011 free If you are a partner in a partnership or shareholder of an S corporation, you add the amount allocated from the partnership or S corporation to any section 179 costs not related to the partnership or S corporation and then apply the dollar limit to this total. Turbotax 2011 free To determine any reduction in the dollar limit for costs over $560,000, you do not include any of the cost of section 179 property placed in service by the partnership or S corporation. Turbotax 2011 free After you apply the dollar limit, you apply the business income limit to any remaining section 179 costs. Turbotax 2011 free For more information, see chapter 2 of Publication 946. Turbotax 2011 free Example. Turbotax 2011 free In 2013, Partnership P placed in service section 179 property with a total cost of $2,160,000. Turbotax 2011 free P must reduce its dollar limit by $160,000 ($2,160,000 − $2,000,000). Turbotax 2011 free Its maximum section 179 expense deduction is $340,000 ($500,000 − $160,000), and it elects to expense that amount. Turbotax 2011 free Because P's taxable income from the active conduct of all its trades or businesses for the year was $400,000, it can deduct the full $340,000. Turbotax 2011 free P allocates $100,000 of its section 179 expense deduction and $110,000 of its taxable income to John, one of its partners. Turbotax 2011 free John also conducts a business as a sole proprietor and in 2013, placed in service in that business, section 179 property costing $28,000. Turbotax 2011 free John's taxable income from that business was $10,000. Turbotax 2011 free In addition to the $100,000 allocated from P, he elects to expense the $28,000 of his sole proprietorship's section 179 costs. Turbotax 2011 free However, John's deduction is limited to his business taxable income of $120,000 ($110,000 from P plus $10,000 from his sole proprietorship). Turbotax 2011 free He carries over $8,000 ($128,000 − $120,000) of the elected section 179 costs to 2014. Turbotax 2011 free How Do You Elect the Deduction? You elect to take the section 179 expense deduction by completing Part I of Form 4562. Turbotax 2011 free If you elect the deduction for listed property, complete Part V of  Form 4562 before completing Part I. Turbotax 2011 free   File Form 4562 with either of the following: Your original tax return (whether or not you filed it timely), or An amended return filed within the time prescribed by law. Turbotax 2011 free An election made on an amended return must specify the item of section 179 property to which the election applies and the part of the cost of each such item to be taken into account. Turbotax 2011 free The amended return must also include any resulting adjustments to taxable income. Turbotax 2011 free Revoking an election. Turbotax 2011 free   An election (or any specification made in the election) to take a section 179 expense deduction for 2013 can be revoked without IRS approval by filing an amended return. Turbotax 2011 free The amended return must be filed within the time prescribed by law. Turbotax 2011 free The amended return must also include any resulting adjustments to taxable income (for example, allowable depreciation in that tax year for the item of section 179 property for which the election pertains. Turbotax 2011 free ) Once made, the revocation is irrevocable. Turbotax 2011 free When Must You Recapture the Deduction? You may have to recapture the section 179 expense deduction if, in any year during the property's recovery period, the percentage of business use drops to 50% or less. Turbotax 2011 free In the year the business use drops to 50% or less, you include the recapture amount as ordinary income. Turbotax 2011 free You also increase the basis of the property by the recapture amount. Turbotax 2011 free Recovery periods for property are discussed later. Turbotax 2011 free If you sell, exchange, or otherwise dispose of the property, do not figure the recapture amount under the rules explained in this discussion. Turbotax 2011 free Instead, use the rules for recapturing depreciation explained in  chapter 9 under Section 1245 Property. Turbotax 2011 free   If the property is listed property, do not figure the recapture amount under the rules explained in this discussion when the percentage of business use drops to 50% or less. Turbotax 2011 free Instead, use the rules for recapturing depreciation explained in chapter 5 of Publication 946 under Recapture of Excess Depreciation. Turbotax 2011 free Figuring the recapture amount. Turbotax 2011 free   To figure the amount to recapture, take the following steps. Turbotax 2011 free Figure the allowable depreciation for the section 179 expense deduction you claimed. Turbotax 2011 free Begin with the year you placed the property in service and include the year of recapture. Turbotax 2011 free Subtract the depreciation figured in (1) from the section 179 expense deduction you actually claimed. Turbotax 2011 free The result is the amount you must recapture. Turbotax 2011 free Example. Turbotax 2011 free In January 2011, Paul Lamb, a calendar year taxpayer, bought and placed in service section 179 property costing $10,000. Turbotax 2011 free The property is not listed property. Turbotax 2011 free He elected a $5,000 section 179 expense deduction for the property and also elected not to claim a special depreciation allowance. Turbotax 2011 free He used the property only for business in 2011 and 2012. Turbotax 2011 free During 2013, he used the property 40% for business and 60% for personal use. Turbotax 2011 free He figures his recapture amount as follows. Turbotax 2011 free Section 179 expense deduction claimed (2011) $5,000 Minus: Allowable depreciation (instead of section 179 expense deduction):   2011 $1,250   2012 1,875   2013 ($1,250 × 40% (business)) 500 3,625 2013 — Recapture amount $1,375     Paul must include $1,375 in income for 2013. Turbotax 2011 free Where to report recapture. Turbotax 2011 free   Report any recapture of the section 179 expense deduction as ordinary income in Part IV of Form 4797 and include it in income on Schedule F (Form 1040). Turbotax 2011 free Recapture for qualified section 179 GO Zone property. Turbotax 2011 free   If any qualified section 179 GO Zone property ceases to be used in the GO Zone in a later year, you must recapture the benefit of the increased section 179 expense deduction as “other income. Turbotax 2011 free ” Claiming the Special Depreciation Allowance For qualified property (defined below) placed in service in 2013, you can take an additional 50% special depreciation allowance. Turbotax 2011 free The allowance is an additional deduction you can take after any section 179 expense deduction and before you figure regular depreciation under MACRS. Turbotax 2011 free Figure the special depreciation allowance by multiplying the depreciable basis of the qualified property by 50%. Turbotax 2011 free What is Qualified Property? For farmers, qualified property generally is certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Turbotax 2011 free Certain qualified property acquired after December 31, 2007, and placed in service before January 1, 2014. Turbotax 2011 free   Certain qualified property (defined below) acquired after December 31, 2007, and before January 1, 2014, is eligible for a 50% special depreciation allowance. Turbotax 2011 free   Qualified property includes the following: Tangible property depreciated under the Modified Accelerated Cost Recovery System (MACRS) with a recovery period of 20 years or less. Turbotax 2011 free Water utility property. Turbotax 2011 free Off-the-shelf computer software. Turbotax 2011 free Qualified leasehold improvement property. Turbotax 2011 free   Qualified property must also meet all of the following tests: You must have acquired qualified property by purchase after December 31, 2007. Turbotax 2011 free If a binding contract to acquire the property existed before January 1, 2008, the property does not qualify. Turbotax 2011 free Qualified property must be placed in service after December 31, 2007 and placed in service before January 1, 2014 (before January 1, 2015 for certain property with a long production period and for certain aircraft). Turbotax 2011 free The original use of the property must begin with you after December 31, 2007. Turbotax 2011 free For more information, see chapter 3 of Publication 946. Turbotax 2011 free How Can You Elect Not To Claim the Allowance? You can elect, for any class of property, not to deduct the special depreciation allowance for all property in such class placed in service during the tax year. Turbotax 2011 free To make the election, attach a statement to your return indicating the class of property for which you are making the election. Turbotax 2011 free Generally, you must make the election on a timely filed tax return (including extensions) for the year in which you place the property in service. Turbotax 2011 free However, if you timely filed your return for the year without making the election, you still can make the election by filing an amended return within 6 months of the due date of the original return (not including extensions). Turbotax 2011 free Attach the election statement to the amended return. Turbotax 2011 free On the amended return, write “Filed pursuant to section 301. Turbotax 2011 free 9100-2. Turbotax 2011 free ” Once made, the election may not be revoked without IRS consent. Turbotax 2011 free If you elect not to have the special depreciation allowance apply, the property may be subject to an alternative minimum tax adjustment for depreciation. Turbotax 2011 free When Must You Recapture an Allowance When you dispose of property for which you claimed a special depreciation allowance, any gain on the disposition is generally recaptured (included in income) as ordinary income up to the amount of the special depreciation allowance previously allowed or allowable. Turbotax 2011 free For more information, see chapter 3 of Publication 946. Turbotax 2011 free Figuring Depreciation Under MACRS The Modified Accelerated Cost Recovery System (MACRS) is used to recover the basis of most business and investment property placed in service after 1986. Turbotax 2011 free MACRS consists of two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Turbotax 2011 free Generally, these systems provide different methods and recovery periods to use in figuring depreciation deductions. Turbotax 2011 free To be sure you can use MACRS to figure depreciation for your property, see Can You Use MACRS To Depreciate Your Property, earlier. Turbotax 2011 free This part explains how to determine which MACRS depreciation system applies to your property. Turbotax 2011 free It also discusses the following information that you need to know before you can figure depreciation under MACRS. Turbotax 2011 free Property's recovery class. Turbotax 2011 free Placed-in-service date. Turbotax 2011 free Basis for depreciation. Turbotax 2011 free Recovery period. Turbotax 2011 free Convention. Turbotax 2011 free Depreciation method. Turbotax 2011 free Finally, this part explains how to use this information to figure your depreciation deduction. Turbotax 2011 free Which Depreciation System (GDS or ADS) Applies? Your use of either the General Depreciation System (GDS) or the Alternative Depreciation System (ADS) to depreciate property under MACRS determines what depreciation method and recovery period you use. Turbotax 2011 free You generally must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Turbotax 2011 free Required use of ADS. Turbotax 2011 free   You must use ADS for the following property. Turbotax 2011 free All property used predominantly in a farming business and placed in service in any tax year during which an election not to apply the uniform capitalization rules to certain farming costs is in effect. Turbotax 2011 free Listed property used 50% or less in a qualified business use. Turbotax 2011 free See Additional Rules for Listed Property , later. Turbotax 2011 free Any tax-exempt use property. Turbotax 2011 free Any tax-exempt bond-financed property. Turbotax 2011 free Any property imported from a foreign country for which an Executive Order is in effect because the country maintains trade restrictions or engages in other discriminatory acts. Turbotax 2011 free Any tangible property used predominantly outside the United States during the year. Turbotax 2011 free If you are required to use ADS to depreciate your property, you cannot claim the special depreciation allowance. Turbotax 2011 free Electing ADS. Turbotax 2011 free   Although your property may qualify for GDS, you can elect to use ADS. Turbotax 2011 free The election generally must cover all property in the same property class you placed in service during the year. Turbotax 2011 free However, the election for residential rental property and nonresidential real property can be made on a property-by-property basis. Turbotax 2011 free Once you make this election, you can never revoke it. Turbotax 2011 free   You make the election by completing line 20 in Part III of Form 4562. Turbotax 2011 free Which Property Class Applies Under GDS? The following is a list of the nine property classes under GDS. Turbotax 2011 free 3-year property. Turbotax 2011 free 5-year property. Turbotax 2011 free 7-year property. Turbotax 2011 free 10-year property. Turbotax 2011 free 15-year property. Turbotax 2011 free 20-year property. Turbotax 2011 free 25-year property. Turbotax 2011 free Residential rental property. Turbotax 2011 free Nonresidential real property. Turbotax 2011 free See Which Property Class Applies Under GDS in chapter 4 of Publication 946 for examples of the types of property included in each class. Turbotax 2011 free What Is the Placed-in-Service Date? You begin to claim depreciation when your property is placed in service for use either in a trade or business or for the production of income. Turbotax 2011 free The placed-in-service date for your property is the date the property is ready and available for a specific use. Turbotax 2011 free It is therefore not necessarily the date it is first used. Turbotax 2011 free If you converted property held for personal use to use in a trade or business or for the production of income, treat the property as being placed in service on the conversion date. Turbotax 2011 free See Placed in Service under When Does Depreciation Begin and End , earlier, for examples illustrating when property is placed in service. Turbotax 2011 free What Is the Basis for Depreciation? The basis for depreciation of MACRS property is the property's cost or other basis multiplied by the percentage of business/investment use. Turbotax 2011 free Reduce that amount by any credits and deductions allocable to the property. Turbotax 2011 free The following are examples of some of the credits and deductions that reduce basis. Turbotax 2011 free Any deduction for section 179 property. Turbotax 2011 free Any deduction for removal of barriers to the disabled and the elderly. Turbotax 2011 free Any disabled access credit, enhanced oil recovery credit, and credit for employer-provided childcare facilities and services. Turbotax 2011 free Any special depreciation allowance. Turbotax 2011 free Basis adjustment for investment credit property under section 50(c) of the Internal Revenue Code. Turbotax 2011 free For information about how to determine the cost or other basis of property, see What Is the Basis of Your Depreciable Property , earlier. Turbotax 2011 free Also, see chapter 6. Turbotax 2011 free For additional credits and deductions that affect basis, see section 1016 of the Internal Revenue Code. Turbotax 2011 free Which Recovery Period Applies? The recovery period of property is the number of years over which you recover its cost or other basis. Turbotax 2011 free It is determined based on the depreciation system (GDS or ADS) used. Turbotax 2011 free See Table 7-1 for recovery periods under both GDS and ADS for some commonly used assets. Turbotax 2011 free For a complete list of recovery periods, see the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Turbotax 2011 free House trailers for farm laborers. Turbotax 2011 free   To depreciate a house trailer you supply as housing for those who work on your farm, use one of the following recovery periods if the house trailer is mobile (it has wheels and a history of movement). Turbotax 2011 free A 7-year recovery period under GDS. Turbotax 2011 free A 10-year recovery period under ADS. Turbotax 2011 free   However, if the house trailer is not mobile (its wheels have been removed and permanent utilities and pipes attached to it), use one of the following recovery periods. Turbotax 2011 free A 20-year recovery period under GDS. Turbotax 2011 free A 25-year recovery period under ADS. Turbotax 2011 free Water wells. Turbotax 2011 free   Water wells used to provide water for raising poultry and livestock are land improvements. Turbotax 2011 free If they are depreciable, use one of the following recovery periods. Turbotax 2011 free A 15-year recovery period under GDS. Turbotax 2011 free A 20-year recovery period under ADS. Turbotax 2011 free   The types of water wells that can be depreciated were discussed earlier in Irrigation systems and water wells under Property Having a Determinable Useful Life . Turbotax 2011 free Table 7-1. Turbotax 2011 free Farm Property Recovery Periods   Recovery Period in Years Assets GDS ADS Agricultural structures (single purpose) 10 15 Automobiles 5 5 Calculators and copiers 5 6 Cattle (dairy or breeding) 5 7 Communication equipment1 7 10 Computer and peripheral equipment 5 5 Drainage facilities 15 20 Farm buildings2 20 25 Farm machinery and equipment 7 10 Fences (agricultural) 7 10 Goats and sheep (breeding) 5 5 Grain bin 7 10 Hogs (breeding) 3 3 Horses (age when placed in service)     Breeding and working (12 years or less) 7 10 Breeding and working (more than 12 years) 3 10 Racing horses 3 12 Horticultural structures (single purpose) 10 15 Logging machinery and equipment3 5 6 Nonresidential real property 394 40 Office furniture, fixtures, and equipment (not calculators, copiers, or typewriters) 7 10 Paved lots 15 20 Residential rental property 27. Turbotax 2011 free 5 40 Tractor units (over-the-road) 3 4 Trees or vines bearing fruit or nuts 10 20 Truck (heavy duty, unloaded weight 13,000 lbs. Turbotax 2011 free or more) 5 6 Truck (actual weight less than 13,000 lbs) 5 5 Water wells 15 20 1 Not including communication equipment listed in other classes. Turbotax 2011 free 2 Not including single purpose agricultural or horticultural structures. Turbotax 2011 free 3 Used by logging and sawmill operators for cutting of timber. Turbotax 2011 free 4 For property placed in service after May 12, 1993; for property placed in service before May 13, 1993,  the recovery period is 31. Turbotax 2011 free 5 years. Turbotax 2011 free Which Convention Applies? Under MACRS, averaging conventions establish when the recovery period begins and ends. Turbotax 2011 free The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. Turbotax 2011 free Use one of the following conventions. Turbotax 2011 free The half-year convention. Turbotax 2011 free The mid-month convention. Turbotax 2011 free The mid-quarter convention. Turbotax 2011 free For a detailed explanation of each convention, see Which Convention Applies in chapter 4 of Publication 946. Turbotax 2011 free Also, see the Instructions for Form 4562. Turbotax 2011 free Which Depreciation Method Applies? MACRS provides three depreciation methods under GDS and one depreciation method under ADS. Turbotax 2011 free The 200% declining balance method over a GDS recovery period. Turbotax 2011 free The 150% declining balance method over a GDS recovery period. Turbotax 2011 free The straight line method over a GDS recovery period. Turbotax 2011 free The straight line method over an ADS recovery period. Turbotax 2011 free Depreciation Table. Turbotax 2011 free   The following table lists the types of property you can depreciate under each method. Turbotax 2011 free The declining balance method is abbreviated as DB and the straight line method is abbreviated as SL. Turbotax 2011 free Depreciation Table System/Method   Type of Property GDS using  150% DB • All property used in a farming business (except real property)   • All 15- and 20-year property   • Nonfarm 3-, 5-, 7-, and 10-year property1 GDS using SL • Nonresidential real property   • Residential rental property   • Trees or vines bearing fruit or nuts   • All 3-, 5-, 7-, 10-, 15-, and 20-year property1 ADS using SL • Property used predomi- nantly outside the United States   • Farm property used when an election not to apply the uniform capitalization rules is in effect   • Tax-exempt property   • Tax-exempt bond-financed property   • Imported property2   • Any property for which you elect to use this method1 GDS using  200% DB • Nonfarm 3-, 5-, 7-, and 10-year property 1Elective method 2See section 168(g)(6) of the Internal Revenue  Code Property used in farming business. Turbotax 2011 free   For personal property placed in service after 1988 in a farming business, you must use the 150% declining balance method over a GDS recovery period or you can elect one of the following methods. Turbotax 2011 free The straight line method over a GDS recovery period. Turbotax 2011 free The straight line method over an ADS recovery period. Turbotax 2011 free For property placed in service before 1999, you could have elected to use the 150% declining balance method using the ADS recovery periods for certain property classes. Turbotax 2011 free If you made this election, continue to use the same method and recovery period for that property. Turbotax 2011 free Real property. Turbotax 2011 free   You can depreciate real property using the straight line method under either GDS or ADS. Turbotax 2011 free Switching to straight line. Turbotax 2011 free   If you use a declining balance method, you switch to the straight line method in the year it provides an equal or greater deduction. Turbotax 2011 free If you use the MACRS percentage tables, discussed later under How Is the Depreciation Deduction Figured , you do not need to determine in which year your deduction is greater using the straight line method. Turbotax 2011 free The tables have the switch to the straight line method built into their rates. Turbotax 2011 free Fruit or nut trees and vines. Turbotax 2011 free   Depreciate trees and vines bearing fruit or nuts under GDS using the straight line method over a 10-year recovery period. Turbotax 2011 free ADS required for some farmers. Turbotax 2011 free   If you elect not to apply the uniform capitalization rules to any plant shown in Table 6-1 of chapter 6 and produced in your farming business, you must use ADS for all property you place in service in any year the election is in effect. Turbotax 2011 free See chapter 6 for a discussion of the application of the uniform capitalization rules to farm property. Turbotax 2011 free Electing a different method. Turbotax 2011 free   As shown in the Depreciation Table , you can elect a different method for depreciation for certain types of property. Turbotax 2011 free You must make the election by the due date of the return (including extensions) for the year you placed the property in service. Turbotax 2011 free However, if you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Turbotax 2011 free Attach the election to the amended return and write “Filed pursuant to section 301. Turbotax 2011 free 9100-2” on the election statement. Turbotax 2011 free File the amended return at the same address you filed the original return. Turbotax 2011 free Once you make the election, you cannot change it. Turbotax 2011 free    If you elect to use a different method for one item in a property class, you must apply the same method to all property in that class placed in service during the year of the election. Turbotax 2011 free However, you can make the election on a property-by-property basis for residential rental and nonresidential real property. Turbotax 2011 free Straight line election. Turbotax 2011 free   Instead of using the declining balance method, you can elect to use the straight line method over the GDS recovery period. Turbotax 2011 free Make the election by entering “S/L” under column (f) in Part III of Form 4562. Turbotax 2011 free ADS election. Turbotax 2011 free   As explained earlier under Which Depreciation System (GDS or ADS) Applies , you can elect to use ADS even though your property may come under GDS. Turbotax 2011 free ADS uses the straight line method of depreciation over the ADS recovery periods, which are generally longer than the GDS recovery periods. Turbotax 2011 free The ADS recovery periods for many assets used in the business of farming are listed in Table 7–1. Turbotax 2011 free Additional ADS recovery periods for other classes of property may be found in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946. Turbotax 2011 free How Is the Depreciation Deduction Figured? To figure your depreciation deduction under MACRS, you first determine the depreciation system, property class, placed-in-service date, basis amount, recovery period, convention, and depreciation method that applies to your property. Turbotax 2011 free Then you are ready to figure your depreciation deduction. Turbotax 2011 free You can figure it in one of two ways. Turbotax 2011 free You can use the percentage tables provided by the IRS. Turbotax 2011 free You can figure your own deduction without using the tables. Turbotax 2011 free Figuring your own MACRS deduction will generally result in a slightly different amount than using the tables. Turbotax 2011 free Using the MACRS Percentage Tables To help you figure your deduction under MACRS, the IRS has established percentage tables that incorporate the applicable convention and depreciation method. Turbotax 2011 free These percentage tables are in Appendix A of Publication 946. Turbotax 2011 free Rules for using the tables. Turbotax 2011 free   The following rules cover the use of the percentage tables. Turbotax 2011 free You must apply the rates in the percentage tables to your property's unadjusted basis. Turbotax 2011 free Unadjusted basis is the same basis amount you would use to figure gain on a sale but figured without reducing your original basis by any MACRS depreciation taken in earlier years. Turbotax 2011 free You cannot use the percentage tables for a short tax year. Turbotax 2011 free See chapter 4 of Publication 946 for information on how to figure the deduction for a short tax year. Turbotax 2011 free You generally must continue to use them for the entire recovery period of the property. Turbotax 2011 free You must stop using the tables if you adjust the basis of the property for any reason other than— Depreciation allowed or allowable, or An addition or improvement to the property, which is depreciated as a separate property. Turbotax 2011 free Basis adjustment due to casualty loss. Turbotax 2011 free   If you reduce the basis of your property because of a casualty, you cannot continue to use the percentage tables. Turbotax 2011 free For the year of the adjustment and the remaining recovery period, you must figure the depreciation yourself using the property's adjusted basis at the end of the year. Turbotax 2011 free See Figuring the Deduction Without Using the Tables in chapter 4 of Publication 946. Turbotax 2011 free Figuring depreciation using the 150% DB method and half-year convention. Turbotax 2011 free    Table 7-2 has the percentages for 3-, 5-, 7-, and 20-year property. Turbotax 2011 free The percentages are based on the 150% declining balance method with a change to the straight line method. Turbotax 2011 free This table covers only the half-year convention and the first 8 years for 20-year property. Turbotax 2011 free See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Turbotax 2011 free   The following examples show how to figure depreciation under MACRS using the percentages in Table 7-2 . Turbotax 2011 free Example 1. Turbotax 2011 free During the year, you bought an item of 7-year property for $10,000 and placed it in service. Turbotax 2011 free You do not elect a section 179 expense deduction for this property. Turbotax 2011 free In addition, the property is not qualified property for purposes of the special depreciation allowance. Turbotax 2011 free The unadjusted basis of the property is $10,000. Turbotax 2011 free You use the percentages in Table 7-2 to figure your deduction. Turbotax 2011 free Since this is 7-year property, you multiply $10,000 by 10. Turbotax 2011 free 71% to get this year's depreciation of $1,071. Turbotax 2011 free For next year, your depreciation will be $1,913 ($10,000 × 19. Turbotax 2011 free 13%). Turbotax 2011 free Example 2. Turbotax 2011 free You had a barn constructed on your farm at a cost of $20,000. Turbotax 2011 free You placed the barn in service this year. Turbotax 2011 free You elect not to claim the special depreciation allowance. Turbotax 2011 free The barn is 20-year property and you use the table percentages to figure your deduction. Turbotax 2011 free You figure this year's depreciation by multiplying $20,000 (unadjusted basis) by 3. Turbotax 2011 free 75% to get $750. Turbotax 2011 free For next year, your depreciation will be $1,443. Turbotax 2011 free 80 ($20,000 × 7. Turbotax 2011 free 219%). Turbotax 2011 free Table 7-2. Turbotax 2011 free 150% Declining Balance Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 25. Turbotax 2011 free 0 % 15. Turbotax 2011 free 00 % 10. Turbotax 2011 free 71 % 3. Turbotax 2011 free 750 % 2 37. Turbotax 2011 free 5   25. Turbotax 2011 free 50   19. Turbotax 2011 free 13   7. Turbotax 2011 free 219   3 25. Turbotax 2011 free 0   17. Turbotax 2011 free 85   15. Turbotax 2011 free 03   6. Turbotax 2011 free 677   4 12. Turbotax 2011 free 5   16. Turbotax 2011 free 66   12. Turbotax 2011 free 25   6. Turbotax 2011 free 177   5     16. Turbotax 2011 free 66   12. Turbotax 2011 free 25   5. Turbotax 2011 free 713   6     8. Turbotax 2011 free 33   12. Turbotax 2011 free 25   5. Turbotax 2011 free 285   7         12. Turbotax 2011 free 25   4. Turbotax 2011 free 888   8         6. Turbotax 2011 free 13   4. Turbotax 2011 free 522   Figuring depreciation using the straight line method and half-year convention. Turbotax 2011 free   The following table has the straight line percentages for 3-, 5-, 7-, and 20-year property using the half-year convention. Turbotax 2011 free The table covers only the first 8 years for 20-year property. Turbotax 2011 free See Appendix A in Publication 946 for complete MACRS tables, including tables for the mid-quarter and mid-month convention. Turbotax 2011 free Table 7-3. Turbotax 2011 free Straight Line Method (Half-Year Convention) Year 3-Year 5-Year 7-Year 20-Year 1 16. Turbotax 2011 free 67 % 10 % 7. Turbotax 2011 free 14 % 2. Turbotax 2011 free 5 % 2 33. Turbotax 2011 free 33   20   14. Turbotax 2011 free 29   5. Turbotax 2011 free 0   3 33. Turbotax 2011 free 33   20   14. Turbotax 2011 free 29   5. Turbotax 2011 free 0   4 16. Turbotax 2011 free 67   20   14. Turbotax 2011 free 28   5. Turbotax 2011 free 0   5     20   14. Turbotax 2011 free 29   5. Turbotax 2011 free 0   6     10   14. Turbotax 2011 free 28   5. Turbotax 2011 free 0   7         14. Turbotax 2011 free 29   5. Turbotax 2011 free 0   8         7. Turbotax 2011 free 14   5. Turbotax 2011 free 0